Micro Economics –ECO402
VU
Duopoly Example 30
Q1
Firm 2’s Reaction Curve
The demand curve is P = 30 Q and both firms have 0 marginal cost.
Cournot Equilibrium 15 10
Firm 1’s Reaction Curve 10
15
30
Q2
Profit Maximization with Collusion
– Collusion Curve • Q1 + Q2 = 15
–Shows all pairs of output Q
1
• Q1 = Q2 = 7.5
and Q2 that maximizes total profits
–Less output and higher profits than the Cournot equilibrium 30 Q1
The demand curve is P = 30 Q and Firm 2’s both firms have 0 marginal Reaction Curve cost.
Cournot Equilibrium
15 10
Firm 1’s Reaction 10
15
30
Curve Q2
FIRST MOVER ADVANTAGE- THE STACKELBERG MODEL Assumptions • One firm can set output first • MC = 0 • Market demand is P = 30 - Q where Q = total output • Firm 1 sets output first and Firm 2 then makes an output decision Firm 1 must consider the reaction of Firm 2. Firm 2 takes Firm 1’s output as fixed and therefore determines output with the Cournot reaction curve. Firm 1 © Copyright Virtual University of Pakistan
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